ContractsProf Blog

Editor: Jeremy Telman
Oklahoma City University
School of Law

Wednesday, June 5, 2024

Politicians Can Do Quid Pro Quo Deals, Can Naval Officers?

Last term, SCOTUS decided two cases involving political corruption. In Ciminelli v. United States, the Court rejected New York's right of control theory as a tool in fighting corruption in government bid practices, as we discussed here and here. In Percoco v. United States, the Court reversed and remanded a conviction for violation of the federal "honest services" statute because jury instructions in the case were too vague. This builds on a line of cases going back to the Bridgegate case in which SCOTUS has made it increasingly difficult to prosecute political corruption.

SCOTUS 2022In April, SCOTUS again indicated its willingness to make it difficult to prosecute politicians who receive kickbacks.  Snyder v. U.S. is about a former mayor of Portage, Indiana who was convicted in a kickback scheme.  He was found to have rigged a bid to favor a particular company and then to have approached that company demanding a payment of $15,000.  He received $13,000, which was characterized as a consulting fee for services yet to be rendered to the company.  In oral argument, the court seemed poised to overturn the conviction.  There was a lot of discussion in the oral arguments about the difference between a gratuity and a bribe, and the Justices seemed very concerned that honest politicians would be accused of bribery just for accepting a $100 Starbucks gift card.

Really?  I wouldn't accept a $100 Starbucks gift card from a student.  Why would a politician accept a $100 Starbucks gift card from a constituent to whom he is steering a contract if not as a bribe?  There might be nothing nefarious going on, but that is a matter of determining intent, a feat that is not beyond the capabilities of courts. It's just weird that the Justices have a hard time recognizing corruption when it's staring them in the face.  It's almost as if one of them had  accepted gifts that raised questions about their ability to remain neutral when the interests of the gift-giver are implicated in pending matters.

Last week's New York Times brings a story from Michael Levenson about the arrest of a retired naval officer based on allegations that seem quite similar to those in Snyder.  According to the Times, Robert Burke, once the second highest-ranking officer in the Navy, steered a government contract worth hundreds of millions of dollars to a company in exchange for a position with that company that guaranteed him a salary of $500,000 plus 100,000 stock options.  If the transaction in Snyder is held to be a gratuity rather than a bribe, this seems more gratuity than bribe.  Admiral Burke and his alleged co-conspirators have nonetheless been charged with bribery and conspiracy to commit bribery.  If the arrest leads to a conviction, it will be interesting to see if SCOTUS keeps up its string of standing up for officials accused of corruption. 

June 5, 2024 in Commentary, Current Affairs, Government Contracting, In the News, Recent Cases | Permalink | Comments (1)

Wednesday, May 29, 2024

Taxpayers of Oklahoma Pay for a PR Firm to Promote Its State Superintendant of Schools

Corruption in Oklahoma is probably no worse than corruption in other states, but it just seems like it is both more petty and more shameless.

There's the Epic schools scandal. This was the state's first virtual charter school, and its founders syphoned off millions of taxpayer dollars for their own private use.  Meanwhile, between 2014 and 2020, the principals donated $500,000 to the campaigns of individual Oklahoma politicians and $2 million to various political action committees. The fraud investigation began in 2014.  The principals were charged in 2022 with racketeering, embezzlement, obtaining money by false pretense, conspiracy to commit a felony, violation of the Computer Crimes Act, submitting false documents to the state, and unlawful proceeds.  Who knows if the public will ever disgorge their ill-gotten gains or if they will ever serve time for their crimes. 

Ryan_WaltersThen there's the Swadley's Foggy Bottom Kitchen scandal, which we summarized here.  In short, the state gave a local restaurant chain an exclusive license to provide food service in Oklahoma's state parks. The restaurant won the opportunity through a process in which it was the only bidder and then it overcharged the state for management fees.

The latest is a chapter from the hijinks and shenanigans of the State Superintendent of Schools, Ryan Walters (right), some of which were recounted here and here.  Last week, Jennifer Palmer, writing for The Oklahoman reported that a Republican lawmaker is trying to introduce limits on the state's 2025 budget to prohibit funds from being used to pay for Mr. Walter's  national publicity contract with Washington, D.C.-based Vought Strategies.

The contract potentially pays hundreds of thousands of dollars to the PR firm.  Mr. Walters claims that the purpose of the contract is to help recruit teachers.  Critics contend that the purpose of the contract is really to promote Mr. Walters' career on a national level.  None of the advertising spots thus far produced relate to teacher recruitment.  Rather, according to The Oklahoman, "Vought Strategies pitched interviews about fentanyl and the southern border, drag queens in the classroom, teacher unions, library books and [Mr. Walters'] appointment of Chaya Raichik, the far-right social media influencer behind Libs of TikTok, to a library advisory committee."

Despite clear political ties between Mr. Walters and the agency, inappropriate communications with the agency during a nominally competitive bid process, and questions about the agency's qualifications for a government contract under Oklahoma law, the contract remains in force.  If the Epic scandal is any indication, investigations will be on-going, and indictments will be handed down somewhere around 2035.  Meanwhile, if Mr. Walters really wants to attract teachers to Oklahoma, maybe he should stop trying to revoke their licenses for giving students access to books.

May 29, 2024 in Commentary, Current Affairs, Government Contracting, In the News | Permalink | Comments (0)

Tuesday, May 7, 2024

Teachers Bring Breach of Contract Suit Against the Oklahoma Department of Education

Ryan_WaltersKeeping with this week's theme of Oklahoma news, we have a day in the life of the Oklahoma State Department of Eduction (OSDE) under the leadership of Ryan Walters (right). Mr. Walters is the State Superintendent of Schools.  I have never before known who the superintendent of schools was for the state in which I lived, but Mr. Walters manages to grab headlines almost every day.  The headlines are not about how much Oklahoma schools have improved or about the successes those schools have had in recruiting new teachers.  Rather, they tend to be about banning books, shutting down D.E.I. programs, partnering with providers of conservative educational materials, losing employees, including the entire legal team, and difficulties in accounting for federal funds allocated to Oklahoma.

Two teachers are suing Mr. Walters.  The two teachers allege that they signed a contract in November, 2023, in exchange for a $50,000 signing bonus.  In January 2024, the OSDE demanded repayment of the bonus, and according to the complaint in Bojorquez v. State of Oklahoma, Mr. Walters claimed that the only reason they had been paid the bonuses was that they lied on their applications.  As a result of that statement, plaintiffs are suing not just for breach of contract but also for defamation.  

Stay tuned.

May 7, 2024 in Current Affairs, Government Contracting, In the News, Recent Cases | Permalink | Comments (0)

Thursday, April 4, 2024

Implied Contracts and Good Faith in Norman, Oklahoma

Screenshot 2024-03-18 at 5.32.08 PMOklahoma City University School of Law 1L Lino Sengkhamvilay (right) shared this story with me.  Thanks, Lino!

In 2023, voters in the city of Norman rejected a long-term agreement between the city and the utility company, OG&E. The matter was on the ballot again in 2024, and it was defeated by 33 votes, as reports for KOCO News. Those who voted no apparently objected to the 25-year term of the agreement. Why couldn't the city enter into a five-year agreement with OG&E, so that it would have some leverage that it could exercise regularly? 

According to the reporting, Oklahoma requires municipalities to have agreements with power companies. So what now?

OG&E issued the following statement:

We are disappointed in the election outcome. Without a franchise agreement, OG&E and the city of Norman will continue to operate under an implied contract. Over the last five years OG&E has worked in good faith with the city, investing tens of millions of dollars improving reliability in the absence of a franchise agreement. Unfortunately, that good faith was not reciprocated. We will evaluate the long-term status of other agreements or projects underway with the city. OG&E has served Norman for more than 100 years and remains committed to our customers. We will continue to provide the electricity they need to power their homes and businesses.

So many interesting questions! 

First, when the legislature requires that municipalities and utilities be governed by an "agreement," did they have an implied contract in mind? Second, what are the terms of the implied contract and what limits does it place on OG&E's discretion to "evaluate the status of other agreements or projects underway with the city." Finally, who is OG&E accusing of not reciprocating its good faith? The city? How did the city violate its good faith obligations? The city put the contract on the ballot, as it presumably was required to do, and the mayor advocated for its approval. 

Is a monopoly utility accusing the voters who rejected a 25-year agreement of acting in bad faith. If so, that is wonderfully on brand. For those customers, this is a 25-year rolling contract of adhesion. What? You don't want to be bound for 25 years by a contract that you had no role in negotiating and cannot change, under which your utility bills may double or triple or quadruple while you have no alternative source of energy to heat or cool your home? How dare you!

Screenshot 2024-03-18 at 7.29.28 AM
Solar Array Nestled in Agricultural Fields

People of Norman: get thee some solar panels or geothermal!

April 4, 2024 in Government Contracting, In the News | Permalink

Wednesday, November 29, 2023

Take the Money and Run, Pass, or Kick

Recently, Sid DeLong wowed us with an interesting perspective on the case of Danish performance artist Jens Haaning.  As readers of the blog well know, Haaning was commissioned to produce artwork incorporating $70,000 in Danish currency that the commissioning museum advanced to him for incorporation into the work.  Hanning never provided the work; instead, he delivered two blank canvases entitled Take the Money and Run.  

No biggy, Sid pointed out.  People get paid for doing nothing all the time.  Farmers get paid not to plant crops when the government is trying to control against overproduction.  Young William Story was entitled to collect from his Uncle William for successfully abstaining from certain corrupt behaviors before turning twenty-one.

Jimbo_A&M_Press_Conference
Image by Ethridgem, via Wikimedia Commons

But if you really want to get paid the big bucks for doing nothing, I recommend coaching.  As I learned from Bobby Chesney and Steve Vladeck on their excellent, most recent, edition of the National Security Law Podcast, Texas A & M University is paying Jimbo Fisher (right) $75 million for not coaching its football team between now and 2031.  

Doug Lederman provides some details in Inside Higher EducationAccording to the story, Mr. Fisher's contract was renewed in 2021 for ten years, and the contract was guaranteed, which meant that he would be paid whether or not he continued as coach.  You might be wondering how the taxpayers of Texas feel about having their money being used in a Bobby Bonilla style boondoggle.  The answer is probably that they are fine with it.  What's government for if not for building college football programs?  But just in case Texas taxpayers have other priorities, the university stresses that the $75 million will not come out of the university's regular budget but from "donor funds."

This strikes me as a relatively transparent shell game.  That $75 million in donor funds that will be going into Mr. Fisher's pocket are $75 million that the university might use for other, presumably sports-related, purposes.  And if the university cannot raise more private donor funds to attract its next football coach, or football stadium, or training facility, or whatever else it needs, the money to cover these new costs will indeed come from university funds that might have been used for, I don't know, educational purposes?

Burge_mark1 Snyder_franklin_gLast I checked, the Texas A &M football team is not ranked in either the AP nor the Coaches poll, nor did they have any votes in either poll, meaning that nobody polled thought that they were a top 25 team.  CBS Sports ranks them at 37.  Meanwhile, Texas A & M's law school is ranked 29th.  By my math, that ranking should entitle the law school's Dean to a guaranteed ten-year contract worth at least $85 million, and some portion of that money ought to go to the Blog, given that the Blog was founded by Texas A & M law faculty member Frank Snyder (left), and Texas A & M faculty member Mark Edwin Burge (right) continues to serve as a contributing editor.  Even a million or two would go a long way towards meeting the Blog's pressing fiscal needs.  I'm not asking for much.

One might think that Mr. Fisher will not in the end actually collect his $75 million from Texas A & M or its donors, because of the duty to mitigate.    But we've been down this path before on the blog, and I think we discovered that coaches who depart with guaranteed contracts do not have a duty to mitigate.  Mr. Fisher is perfectly free to move on to his next gig, command another Brobdingnagian salary, and continue to collect his spoils from Texas A & M.  In our world of the parable of his talents, this is righteousness.  Not compounding his windfall with greater lucre would be regarded as a wasteful, and Mr. Fisher would be consigned to that outer darkness, complete with ambient weeping and gnashing of teeth.

November 29, 2023 in Celebrity Contracts, Commentary, Current Affairs, Government Contracting, Law Schools, Sports | Permalink | Comments (0)

Friday, September 8, 2023

State Contracts with PragerU

Oklahoma's state superintendent of schools, Ryan Walters, has generated a lot of controversy.  Prior to becoming superintendent this year, Mr. Walters was appointed Secretary of Education by Governor Stitt.  In May, 2022, federal auditors found that a program Mr. Walters administered had few safeguards to prevent fraud, and they opened an investigation into the distribution of COVID relief funds under Mr. Walters' tenure.  That same month, Oklahoma newspapers reported that Mr. Walters was continuing in his role as Executive Director of a non-profit funded by national school privatization advocates and charter school expansion advocates.  Mr. Walters was paid a salary of $120,000 in his position with that non-profit, while his state salary was only $40,000. 

Flag_of_Oklahoma
He stepped down from his position at the non-profit upon taking up his office as  superintendent in January 2023.  The Oklahoma Ethics Commission fined him for fourteen violations of state campaign ethics rules in connection with the election that got him there.  The Oklahoma legislature refused to act on his nomination for a second term as Secretary of Education after the Oklahoma Attorney General told lawmakers that it was illegal for Mr. Walters to hold both positions simultaneously.  

In office, Mr. Walters crossed swords with the Attorney General again, when he attempted to revoke the licenses of teachers who spoke out against new laws that regulate the ways that the subjects of race and gender can be taught in public schools.  He expressed views on the Tulsa Race Massacre that earned him a parody article in The Onion.  Most recently, he threatened to remove accreditation from Tulsa Public Schools, and the Tulsa superintendent resigned in protest, a move that Mr. Walters cheered, calling it a tremendous day for Tulsa parents.  The school board did not agree.  According to this report from local news channel, KTUL, one board member explained the decision to accept the Tulsa superintendent's resignation as follows, "We're devastated as a board but we're going to do what's best for students we have to move forward."

Now, as Chris Casteel reports in The Oklahoman, taking his cues from Florida, Mr. Walters has announced a "partnership" with PragerU Kids.  PragerU's videos are provided for free, so it's not clear why a "partnership" is called for.  Nor is it clear why the state would promote videos from a company whose content has been restricted, demonetized, or flagged by YouTube because they contained misinformation.  In 2018, a U.S. District Court dismissed PragerU's suit against YouTube, a ruling that was upheld by the 9th Circuit on appeal.  

PragerU is a non-profit organization that announces its goal as countering "the dominant left-wing ideology in culture, media, and education."  Prager U is funded by conservative donors whose views on education are closely aligned with the views of those who paid Mr. Walters's salary when he was executive director of a non-profit.   PragerU calls itself "the world’s leading conservative nonprofit that is focused on changing minds."  

This is the politics of shamelessness.  Accusing those on the left of surreptitiously doing what conservatives do openly permits politicians to boast of their adoption of shameful measures.  Students deserve to be provided with the best education we can offer them.  They should be provided with the full picture of the American experience, rather than one sanitized to promote a shallow patriotism fueled by ignorance of the diversity and the complexity of our shared history.  If "culture, media, and education" are dominated by "left-wing views," perhaps it is because it is impossible to study U.S. history without realizing that the views of history associated with the left arose organically in response to politics and a society that have not always been consistent with the story that PragerU wants to promote about U.S. history.  

As and report in The Tulsa World, schools have no plans to supplement their curricula with PragerU materials.  According to the Oklahoma Department of Education, which has added links to PragerU to its website, the "partnership" is limited to placing those links on the state website and will not have a financial cost to the state.  As so often in the culture wars, this is a lot of sound and fury over not very much because you really cannot force people to adopt the views of a small minority, no matter how vocal or how overrepresented they are in state politics.  Still, there is a cost to the state.  It's just not a financial cost.

September 8, 2023 in Commentary, Current Affairs, Government Contracting, In the News | Permalink | Comments (2)

Tuesday, September 5, 2023

College Football Coach Fired for Failure to Comply with the Clery Act

WSSUKienus Perez Boulware (Boulware) was employed by the Winston-Salem State University (WSSU) since 2010.  In 2016, he entered into a four-year contract as head coach.  Among his "other duties . . . as may be assigned," Boulware served as a Campus Security Authority, tasked with assisting WSSU in complying with its duties under the Clery Act, which requires universities to track and report crimes. 

In April 2019, two football players got into a fight on the field.  They then fought in the locker room.  They were sent home to their dorms, where they continued to fight.  The father of one of the football players told Mr. Boulware that there might have been a gun involved.  Mr. Boulware went to the dorm room, discovered what was likely marijuana, but did not search for a gun after the players denied that there was one.  

A few weeks later, the school began proceedings to terminate Mr. Boulware for cause.  He had not notified campus police or any other authorities, despite a situation that clearly posed a potential threat to security on campus.  He thus violated his duties as a Campus Security Authority.  Mr. Boulware exhausted his on-campus avenues of review and then appealed his termination in state court.

In July, in Boulware v. University of North Carolina Board of Governors, the North Carolina Court of Appeals sided with WSSU and ruled that his termination was valid.  WSSU had correctly interpreted the Clery Act and had stated multiple grounds for terminating Mr. Boulware and had been asserting those grounds consistently throughout the proceedings.  

September 5, 2023 in Government Contracting, Recent Cases, Sports | Permalink | Comments (0)

Wednesday, August 23, 2023

Texas Supreme Court Addresses State Sovereign Immunity and Construction Contracts

Texas_Southern_University_seal.svgIn 2014, Texas Southern University (TSU) executed a contract with Pepper-Lawson/Horizon International Group (PLH)  on a project to construct student housing.  The contract required  completion by August 31, 2015, subject to justified time extensions and equitable price adjustments for certain types of delays.   PLH did not complete the project until February 2016, and then invoiced TSU for $7 million, $3.3 million due under the contract and plus $3.7 million for “additional direct costs” PLH had allegedly incurred due to “excusable delays.” 

TSU refused to pay, and PLH sued.  Both the facts and the interplay of contracts provisions involve multiple complexities.  The issue on appeal was whether sovereign immunity barred the suit.   

Although PLH’s pleadings expressly invoked the immunity waiver in Section 114.003 of the Texas Civil Practice and Remedies Code, TSU made a jurisdictional argument, asserting Section 114.003 was inapplicable because PLH failed to plead a claim covered by the waiver provision.  TSU claimed that (1) PLH failed to plead facts showing “breach of an express provision of the contract”; (2) PLH failed to point to a contractual provision expressly allowing recovery of damages for owner-caused delays or attorney’s fees; and that remaining claims were moot.  As a result, PLH was not entitled to enhanced interest or attorney's fees.  

ScotxThe trial court rejected TSU's arguments, but the Texas court of appeals, reversed on an interlocutory appeal.  In Pepper Lawson Horizon International Group LLC v. Texas Southern University, the Supreme Court of Texas, without hearing or oral argument, found that the court of appeals erred.  The issue was not whether the contract unambiguously established a waiver of sovereign immunity but whether the statute did so.  PLH had adequately alleged that it did, and it adequately alleged a breach of contract entitling it to damages.  Plaintiffs need not prove their case on a jurisdictional challenge.  They only have to make allegations sufficient to establish jurisdiction.

The case was remanded to proceed to the merits.

August 23, 2023 in Government Contracting, Recent Cases | Permalink | Comments (0)

Tuesday, August 15, 2023

The State Secrets Privilege, Contracts, Potential Fraud, and the First Circuit

Last week, I taught a one-week "premester" course on the state secrets privilege (SSP).  I taught it last year, and my libertarian students are all delighted as their communitarian professor gives them new reasons to distrust the government.  This year, we featured a guest appearance (via video conference) by the incomparable Dean Bobby Chesney as a special treat for our closing session.

LincolnWe start with contracts material -- the Totten doctrine, a post-Civil War case which provides that allegations that the government breached a secret agreement are non-justiciable.  The parties must know when they enter the contract that, with respect to it, their lips are "forever sealed."  Forever?  Over a century later courts were still applying Totten even to agreements with saboteurs.  Seems like sabotage does not stay secret long if you're doing it right.  Whatever.  

B-29_in_flightWe then move on to the SSP proper, which is an evidentiary privilege first recognized in United States v. Reynolds (1953).  There, the Supreme Court recognized a privilege belonging only the the government.  It excuses the government from its discovery obligations when disclosure of the material sought through discovery would pose a risk to national security.  In Reynolds, plaintiffs' decedents were civilian engineers killed in the crash of an Air Force B-29.   They sought a report on an investigation conducted by the Air Force.  The Air Force withheld the report, asserting the SSP (tardily, but whatever).  Without looking at the report (but whatever), which did not contain the sort of national security secrets the government claimed it did, SCOTUS upheld the SSP, and the case settled.  Decades later, when the report was declassified and relatives discovered that the government had misled the courts as to the contents of the report, they brought a coram nobis claim, which the Third Circuit rejected.  Even if the report contained nothing about the flight's secret mission, the Russkies might have learned from the report that B-29s fly in the air at a certain altitude.  Claim denied.  Whatever. 

If the case cannot proceed without the material subject to the privilege, the case must be dismissed.  More alarmingly, if the government cannot defend itself without being able to introduce evidence subject to the SSP, the case must be dismissed.  More alarmingly still, if a plaintiff seeks recovery from a private contractor, the government may intervene and assert the privilege and shut down the case, sometimes even on a pre-Answer motion to dismiss.  One such case made me so mad, I set aside my research agenda during a sabbatical and wrote a rage-fueled 90-page manuscript.  The SSP marches on notwithstanding.

In Sakab Suadi Holding Co. v. Aljabri, we go a step further.  I did not include this case in my course, and once I try to summarize the facts, I think you will understand why.  Sakab Saudi Holding Company (Sakab) is a Saudi government entity.  It alleged that Mr. Aljabri and his associates (collectively Aljabri) defrauded it of billions of dollars.  It seems that Mr. Aljabri was an agent of Saudi Arabia's former Crown Prince Mohammed bin Nayef, who has removed form office in 2017 and has been in detention since 2020.  In 2017 there arose a new Crown Prince over Saudi Arabia, which knew not Aljabri.  Litigation followed.

Sakab first brought suit in Canada where Aljabri resides, and where the agreeable Canadians froze Aljabri's assets worldwide and appointed a receiver for certain assets.  Sakab then filed a complaint in Massachusetts state court seeking to give effect to the Canadian order in the US.  Big mistake.

Classified documentAljabri had the case moved to federal court.  Once there, he had his own story to tell.  He too operated as a Saudi official, and he lawfully used the funds he received from Sakab to engage in counterterrorism activities in partnership with the U.S. government. 

To make a long story short, the U.S. government intervened, asserted the privilege, and shut down the U.S. litigation.  It did not do so by demanding that the litigation come to a halt.  Rather, it submitted in camera classified affidavits indicating that the U.S. government's interests would be endangered were Aljabri to seek to introduce evidence relating to "certain categories of information."  The courts could not say much more about the nature of these affidavits without disclosing the very information they government was trying to protect.  

Even thought the government did not ask for dismissal, that is what it got.  Both the district court and the First Circuit concluded that there was no way for the case to proceed without the materials subject to the SSP, nor could the court grant Sakab any of the preliminary relief it requested.  

To sum up: Sakab and Aljabri had a contractual relationship that may have involved transfers of billions of dollars.  We don't know what Aljabri did for Sakab, but it seems to have related to Saudi counterterrorism efforts, which seem to have been coordinated with U.S. national security agencies.  The U.S. government does not want any information relating to Mr. Aljabri and Sakab's joint activities to be disclosed in U.S. court proceedings because such disclosures would do harm to U.S. foreign relations -- in particular, the threatened harm is to the U.S. relationship with Saudi Arabia, one presumes.  But it was a a Saudi entity that initiated the litigation.  Seems to me that a sovereign state ought not to have its covert operations kept secret while also initiating litigation relating to those covert operations.  And so, perhaps no harm done if Sakab can get no relief in U.S. courts because of the SSP.  

Sometimes the secrets the government tries to protect through the SSP come out in foreign litigation.  We'll see how the courts in Ontario proceed.

August 15, 2023 in Commentary, Government Contracting, Recent Cases, Teaching | Permalink | Comments (0)

Monday, May 22, 2023

Supreme Court Strikes Another Blow Against Prosecuting Corruption in the Buffalo Billions Case

Inspired by Will Baude and Dan EppsDivided Argument podcast, we wrote about a pending SCOTUS case Ciminelli v. United States last November.  Now, thanks are due to Leah Littman, Melissa Murray, and Kate Shaw, and the Strict Scrutiny Podcast's "You Can Crime if You Want To" episode, for reminding me of the case and alerting me to the two opinions that SCOTUS has now issued.

220px-Clarence_Thomas_official_SCOTUS_portraitJustice Thomas (left) wrote for the Court in Ciminelli v. United States.  As we noted in our prior post, the operative legal theory at the District Court and in the Second Circuit was the so-called "right of control," a property-based fraud theory that permits conviction where the defendant through wire fraud (18 U. S. C. §1343) deprives victims of valuable economic information necessary to make discretionary decisions.  The Court unanimously rejected the "right of control" theory as a basis for criminal liability under 18 U. S. C. §1343.

That's too bad, because the opinion outlines what clearly seems to be a criminal conspiracy to rig government contracts by using businesses as front companies so as to direct very large construction contracts to politically-connected insiders.  The Court based its ruling on the statutory text as well as prior case law in which the Court held that the statute does not create a general federal power to police integrity or punish deception.  The crime must involve money or property and not intangible interests such as "honest services."   

You don't need a Weatherman to know that the winds at SCOTUS are blowing in the direction of tighter scrutiny of white-collar criminal convictions, and so the government abandoned the "right of control" theory in its briefing.  Rather, the government tried to persuade the court that there was sufficient evidence in the record to sustain the conviction on a more traditional theft-of-money-or-property theory.  The Court remanded the case to let an actual jury make that determination.  Justice Alito filed a concurring opinion in which he hinted that, if he were on the jury, he knows what he would find . . . .

AlitoJustice Alito wrote for the Court in Percoco v. United States, except that Justice Jackson did not join Part II-C-2.  That part is a bit substantive chunk of the opinion, so I am not sure what it means for her to concur except for that part.  Criminal law.  Sheesh.

Joseph Percoco was convicted of mail and wire fraud for having deprived the public of its intangible right to honest services.  The Court noticed in Ciminelli that intangible offenses such as "honest services" violations cannot provide a basis for conviction under 18 U.S.C. § 1843, but Percoco was convicted under 18 U.S.C. § 1846, which Congress enacted in response to a SCOTUS decision and which specifically encompasses a "scheme or artifice to deprive another of the intangible right of honest services.”

Percoco was a close associate of Governor Cuomo.  During a brief time when he was not an official state employee, but was still an informal advisor to the Governor and was employed by the Governor's campaign, he took $35,000 to operate as a political fixer.  On appeal, he argued that an honest services violation can only occur when the defendant is a public official.  The Court rejected that argument as too sweeping.  Nonetheless, the Court found that the jury instructions in Percoco's case were incorrect.  As in Ciminelli, the government did not defend those instructions but argued that the error was harmless.  Unsurprisingly, the Court disagreed and remanded the case for further proceedings consistent with the opinion.  The instructions on what constitutes an honest services violation were too vague.  The Court did not indicate whether the government's alternative grounds for upholding the conviction could provide a basis for a conviction if actually presented to a jury, nor did it provide clear guidance on what instructions would survive its vagueness analysis.

Justice Gorsuch, joined by Justice Thomas, concurred but would go one step further.  As currently written, 18 U.S.C. § 1836 does not provide private citizens with adequate notice of what constitutes a violation.  The Justices could put their heads together, Justice Gorsuch confidently predicts, and draft a better version of the statute, but that is not their job.  The Court "should decline further invitations to invent rather than interpret this law."  And anyway, the Court's invention workshop is already working overtime on new wrinkles to the major questions doctrine, the history-and-tradition approach to the Fourteenth Amendment, the alternative to Smith in the Free Exercise context, a new version of the dormant commerce clause, and a version of standing flexible enough to allow pro-life doctors with no connection to mifepristone to challenge 20+-year-old FDA rulings.

But I digress.

May 22, 2023 in Government Contracting, Recent Cases | Permalink | Comments (0)

Monday, April 3, 2023

The Magic Kingdom Pulls a Sleight-of-Hand on Governor DeSantis

DeSantisFor over a year, Governor Ron DeSantis of Florida (left) has been trying to curb the independence of the state's top employer, The Disney Company. Because of a special agreement between Disney and the state, Disney governs its 25,000 acre theme park as though it were a county, according to Brooks Barnes writing in The New York Times.  But Disney came into conflict with Governor DeSantis over an education reform known by its opponents as the "Don't Say Gay Law."  Disney and Orlando have quietly become a haven for LGBTQ+ people, as reported last year in The Guardian.  Governor DeSantis hoped to retaliate against Disney for its opposition to the new law by terminating Disney's power over its special tax district.

But things did not go as planned.  If the special task district were abolished, the costs of maintaining it would have to be absorbed by neighboring counties, and the district was carrying $1 billion in debt.  So, the legislature passed a new plan in February.  Disney would retain control over the special tax district but its five-member board would now consist entirely of appointees named by the Governor.   Among others, Governor DeSantis appointed Ron Peri, chief executive of a Christian ministry in Orlando and adherent of the theory that tap water turns people gay.  

Now that's just silly.  Everyone knows that tap water only turns frogs gay.  

Disney+_logo.svgBut Disney had a countermove.  As Brooks Barnes reports, on February 8th, the old board "passed restrictive covenants and a development agreement giving the company vast control over future construction in the district; the new board doesn’t have any say."  You can view the document on the Orlando Sentinel's website here. Disney complied with all requirements  for open public meetings under Florida's Sunshine Laws.  Nonetheless, the board's actions seems to have passed unnoticed, perhaps because the Governor's attention is focused more on his Presidential campaign than on governing his state, or simply because state officials underestimated the ingenuity of private ordering.  The covenants “[s]hall continue in effect until twenty one (21) years after the death of the last survivor of the descendants of King Charles III, King of England living as of the date of this declaration.” 

I checked in with my next-door neighbor, property prof, Carla Spivack, who assures me that the above-quoted language is consistent with the Rule Against Perpetuities.  Disney is clearly no Mickey-Mouse operations.  They hired actual lawyers to do this work, and the lawyers apparently decided to have some fun with it.  

Behold the power of private legislation to fend off some pretty aggressive public legislation. 

Somehow, I'm thinking this ain't over.

April 3, 2023 in Commentary, Current Affairs, Government Contracting, In the News | Permalink | Comments (0)

Thursday, March 23, 2023

Texas AG Ken Paxton Seeks to Scuttle Settlement With Whistleblowers

Ken_Paxton_by_Gage_Skidmore
Image by Gage Skidmore

While I was in Texas for KCON, I came across this news article from James Barragán in The Texas Tribune.  In short, Texas Attorney General Ken Paxton (right) agreed to a $3.3 million settlement with eight whistleblowers who worked with him and were terminated or resigned after accusing him of corruption and abuse of office.  They agreed to pause their suit against General Paxton so that a payment of the settlement could be arranged. 

General Paxton now thinks the pause should to continue indefinitely, and plaintiffs have had to return to court to ask the court to allow the case to proceed.  The Texas legislature is refusing to approve the payment, and Paxton is now arguing that the whistleblowers, having agreed to a settlement that cannot be implemented, should walk away with nothing.  If the legislative session that ends on May 29th awards them nothing, they can wait, General Paxton avers in a legal filing, until the next legislative session . . . in 2025 and then 2027, and so on.

It seems an important commentary on our time that the incredibly powerful Attorney General of our second-most populous state should engage in corruption atop corruption and it doesn't even merit national news.  My quick Google search turned up no reporting on the issue in the national press.  General Paxton boasts on his website that he brought suit against the Obama Administration 27 times in two years.  Sixteen months into the Biden Presidency, General Paxton had already brought 25 challenges to that administration's policies.  It is hard to keep straight all of the cases that the U.S. Supreme Court has heard in the past few years that are captioned Texas v. United States.  And yet, news of significant corruption and abuse of legal process by a politician with a national impact merits little more than a shrug and a sigh.  I spoke with some friends from Texas about the story, but they could not disentangle this story about corrupt politicians from all the others and responded with hopeless resignation.

The settlement agreement included a provision for an apology from Paxton to his former subordinates.  There are no reports that General Paxton has issued the apology.  The Texas Legislature apparently has no interest in using taxpayer dollars to pay for a settlement that would resolve General Paxton's legal problems in this case.  People interested in learning about the other legal fixes for which General Paxton has never been held accountable, including two indictments for securities fraud which somehow, after seven years, still have not gone to trial, can read about them in the Texas Monthly.  

The Texas Montly also provides a litany of complaints about the inefficacy of General Paxton's office in fulfilling its primary mission -- addressing crime in Texas.  That's as may well be, but from this blog's perspective, there's just one legal delict that matters: breach of contract.

March 23, 2023 in Commentary, Current Affairs, Government Contracting, In the News, Legislation, Recent Cases | Permalink | Comments (0)

Wednesday, January 25, 2023

Sid DeLong, The Rainmaker's Case

The Rainmaker’s Case
(and the Aleatory Contingency Fee Scam)

Sidney W. DeLong

Rainmaker

When lawyers hear the word “rainmaker,” they think of a partner in a law firm who makes his money by attracting high-paying clients to the firm. He often assigns their legal work to his partners and associates, whose work earns the firm’s income. But don’t feel sorry for them: a good rainmaker can be worth his weight in gold to his partners, whose net earnings would dwindle without him.

The term “rainmaker” in such a case is metaphorical, referring to tribal magicians who are believed to produce rain by propitiating the gods. The recent devastating floods in drought-stricken California reminded me that “rainmaker” used to have a more literal meaning. A little over a century ago, while California was enduring yet another prolonged drought, an enterprising sewing machine salesman named Charles Mallory Hatfield invented what he claimed was a new, scientific method of making rain. Hatfield sold his services as a “pluviculturist” to several California municipalities under a series of contingency fee contracts in which he would be paid only for producing rain in agreed-upon amounts. The following version of his story can be found here.

In 1915, Hatfield entered a contract with the city of San Diego to produce enough rain to fill the nearby Morena Dam Reservoir. Under the terms of the deal, Hatfield would be paid $1,000 per inch of rain produced between 40 and 50 total inches. He would receive nothing for rain up to 40 inches, which the parties apparently assumed would fall without artificial assistance. He also would receive nothing for rain above 50 inches, which was apparently all that the city needed. The contract provided that the $10,000 fee was payable only when the reservoir was filled.

Morena Reservoir

Hatfield put his mechanism into action and on January 5,1915 it began raining. And raining. And raining. Thirty inches fell in January alone. The rain not only filled the reservoir but caused devastating flooding, which broke a dam and caused millions of dollars in damage. “Hatfield’s Flood” ultimately claimed 50 lives. Pleas to Hatfield to call off the rain were ignored because he was helpless to do so. Instead of calling it off, he doubled-down, promising to provide yet more rain!

Après le deluge, Hatfield confidently claimed his $10,000 fee. The city of San Diego contested the claim. The city denied liability on the oral contract on several grounds. It also counterclaimed against Hatfield for $3.5 million in damages resulting from the flood.

These offsetting tort and contract claims created a perfect legal stalemate. The city could not lose: Either Hatfield was a fraud and did nothing to earn his fee (the rain having fallen without his assistance) or else he did cause the rain and so was liable in tort for the resultant flood damage as an intentional or negligent trespass. Hatfield likewise could not lose: either he earned the fee or else he was not liable because he did not cause the flood. Because neither party could lose, neither could win. The court reportedly held that the rain was an Act of God (not an Act of Hatfield), and so denied both the contract claim and the tort counterclaim. The only rainmakers to make money from the case were the lawyers.

The Rainmaker’s Case resonates with the dark folklore of contract, myths rooted in fears of rash promises and unintended consequences. One trope involves the consequences of breach of a promise to pay for supernatural services. Compare the people of San Diego with the citizens of Hamlin, who made a deal with the Pied Piper to pay for the extermination of the plague of rats. When they refused to pay as promised, he spirited away their children. When the city refused to pay as it had promised, Hatfield punished their breach of contract with more deadly rain.

Fantasia-poster-1940

Or perhaps Hatfield suffered the fate of the Goethe’s Sorcerer’s Apprentice, a role played by Mickey Mouse in the 1940 Disney movie Fantasia. Left to manage the sorcerer’s workshop while his master was away, Mickey wielded magic that he did not understand in order to get his water-carrying chores done by an animated broom, He found himself unable to utter the magic spell that would stop an army of implacable, bucket-carrying brooms from flooding his master’s workshop. The master returned just in time to regain control and the apprentice was duly chastened. Perhaps like Mickey Mouse, Hatfield learned the risks of tampering with the elemental forces of nature. When you mess with Mother Nature, always have a safe word.

Moving from myth to more mundane matters, the Rainmaker’s deal illustrates one of the oldest cons in the book, what I call the Aleatory Contingent Fee Scam. It works like this: Suppose someone approaches you in a casino and, recognizing that you are a novice, makes you the following offer: “I will give you guaranteed roulette wheel betting advice for a fee: If you lose a bet following my advice, you pay me nothing. If you win, you pay me 10% of your winnings.” Hatfield offered rainmaking services to San Diego on exactly the same basis. The city got his services for free if it didn’t rain, while he got paid up to $10,000 if it did.

I trust the reader can see that it would be foolish to agree to pay an aleatory contingency fee on the basis of a chance event. The key to the scam is that the payee cannot influence the contingency and simply rides along on the payor’s good fortune when it occurs.

The reader may be inclined to think that no rational person would agree to an Aleatory Contingency Fee Scam. The reader would be wrong. Consider corporate executive compensation contracts that reward CEO’s with vast bonuses payable on the contingency of stock price movements that the CEO’s may have had little or no hand in influencing. If it doesn’t’ rain, they get nothing. But if it rains, they get rich; and the corporation takes a bath.

January 25, 2023 in Commentary, Government Contracting, True Contracts | Permalink | Comments (0)

Tuesday, January 10, 2023

Universities in New Jersey Are Immune from COVID Suits

Kean_University_Logo.svgThis one starts out like many other cases we have covered in which students sue their universities for switching to remote learning in March 2020.  Plaintiffs in Mueller v. Kean University, students at New Jersey universities, sued alleging breach of contract, unjust enrichment, conversion, or money had and received.  Plaintiffs sought to recover part of the tuition and fees they paid on the ground that the education they received did not conform to their expectations. 

However, this case goes differently because of New Jersey's Emergency Health Powers Act (EHPA). which rendered the universities immune to suit because they acted in compliance with the New Jersey governor's executive orders relating to the COVID pandemic.  The governor issued a series of executive orders between March 16th and 21st that ordered all institutions of higher learning within the state to cease in-person operations.  

Kean University conceded that the online education it provided to students during the Spring 2020 semester was "inherently different" from in-person learning and that it charged more for in-person education than for online programs.  Nonetheless, it refunded only room and board fees but not tuition or other fees, claiming that the EPHA rendered it immune to suit.  The trial court agreed. 

Montclair_State_University_logo.svg
Montclair State University argued both that it was immune to suit and that it had not breached any contractual obligations, having found a way to continue offering educational services to students through online programs.  Here too, the trial court dismissed the complaint based on immunity under the EPHA.  

On appeal, plaintiffs argued that the EPHA immunizes the universities only with respect to liability for "injuries," suggesting that they cannot be sued in tort but that contracts claims may proceed.  The court rejected this argument, noting that the EPHA exempts entities for harms to "property" and defines property to included, among other things, money.  As a result, the court concluded, the EPHA also immunizes the universities against contracts claims.  No action by the universities suggested that they had waived their immunity.

Finally, plaintiffs argued that giving effect to the EPHA in this way violates the constitutional prohibition on state impairments of contracts.  But that constitutional provision has been construed to permit state adjustment of contracts pursuant to the state's general welfare powers.  Plaintiffs did not argue that either the executive orders at issue or the universities' decisions to shut down were unreasonable or unnecessary, and so they did not meet the standard for a contracts clause challenge.

January 10, 2023 in Government Contracting, In the News, Recent Cases | Permalink | Comments (0)

Tuesday, December 27, 2022

Contracts and the Death Penalty in Georgia

Georgia Supreme Court SealLast week, the Georgia Supreme Court provided evidence (if readers of the blog needed any) that contracts can be a life or death matter.  The case, Georgia v. Federal Defender Program, began when a death row prisoner, Virgil Delano Presnell, Jr., filed a breach of contract claim against the state, for failure to abide by a promise made by the state and its attorney general relating to the suspension of execution proceedings during the COVID pandemic. 

Specifically, the agreement, communicated in an e-mail, stated:

Our office will not pursue an execution warrant from the District Attorney in the below defined cases before: 1) the final COVID19 judicial emergency order entered by the Chief Justice of the Supreme Court of Georgia expires; 2) the Georgia Department of Corrections lifts its suspension of legal visitation, and normal visitation resumes; and [3)] a vaccination against COVID19 is readily available to all members of the public.

The Attorney General's office promised not to pursue an execution warrant until six months after the three above-named conditions were met.  And then, one-year later, the state issued an execution order for Mr. Presnell, whose case was indisputably subject to the e-mail referenced above, before two of the three conditions had been met.  

Georgia argued that the e-mail agreement could not be enforced against it without violating sovereign immunity, but the trial court found that the e-mail itself constituted a waiver of sovereign immunity.  Georgia's Supreme Court agreed.  Its discussion might serve as a useful teaching vehicle for those who want to cover electronic signatures.  

The Supreme Court first established that the was no per se rule that Georgia could not waive its sovereign immunity in an e-mail.  Next, there was the trickier issue of whether Georgia had agreed to be bound by electronic signatures in this case, as required under the Georgia Uniform Electronic Transactions Act (GUETA).  The court looked at the context of the parties' interactions and concluded that the state had consented to be bound by electronic means, satisfying GUETA.  The state tried to contend that, in contracts involving the state, certain formal requirements must be met, and the state must explicitly state that it is agreeing to be bound in electronic form.  The Supreme Court found nothing in the statute creating special rules for contracts involving the state.  The only requirement is that the agreement at issue be a "transaction," as defined in GUETA, which this undoubtedly was. "Transaction" is defined to include agreements involving state entities.  

Gergia state flag
Georgia next argued that even if it could waive its immunity by e-mail and even if it had agreed to be bound by electronic form, the e-mail in question was not signed.   The Supreme Court did not buy it.  GUETA provides broad guidelines for what constitutes a signature.  Here, where an agent of the attorney general with proper authority manually typed her name into an e-mail from her government account, she signed on behalf of Georgia, and Georgia was bound.  Another agent of the state confirmed and thus ratified the agreement. 

Going down swinging, Georgia argued that the agreement was unenforceable because it lacked consideration.  The Supreme Court noted that the consideration requirement is easily met.  Here, plaintiffs agreed to be bound by the e-mail in exchange for giving up their efforts for a more complete resolution through legislation addressing all of the issues surrounding the challenges related to capital defense during COVID. 

The Supreme Court wasted little time dismissing Georgia's argument, raised for the first time on appeal, that the argument was unenforceable because vague.  There were other arguments relating to injunctive relief, but there the state fared no better than it had with its contractual claims.

Georgia state sealIt took the majority no less than 87 pages to address all of Georgia's arguments for why it should not be bound by its electronic agreement with the plaintiffs.  In a short concurrence, six Justices noted the state motto: "Wisdom, Justice, Moderation."  The state's conduct in this matter, the concurring Justices noted, could breed cynicism.  "Government is often an accidental vector of our society’s cynicism," the concurrence noted.  "It really should avoid being an intentional one." 

"[T]he State should keep its promises," the concurrence continues, "because The People of Georgia, who are the very source of the State’s sovereignty, are owed a government that honors its commitments."  The Justices regretted that anybody in state government thought it appropriate to ask that the government be excused from doing so. 

It's a peach of an opinion and a dandy concurrence. 

December 27, 2022 in Current Affairs, Government Contracting, In the News, Teaching | Permalink | Comments (1)

Tuesday, December 20, 2022

Cour de Cassation Vacates $15 Billion Arbitral Award Based on International Public Policy

This decision in Belokon v. Kyrgyzstan is from March 2022, but we just got wind of it care of Roslyn Lai and Charles Ho Wang Mak's publication in on the American Society of International Law Website last week.  The ruling is significant because it demonstrates the willingness of even pro-arbitration jurisdictions like France to consider materials not available to the arbitral tribunal.  In this case, the court determined that upholding the award would have enabled the investor to profit from money laundering.

Court_of_cassation
Cour de Cassation
Image by Arushi0880, CC BY-SA 4.0 via Wikimedia Commons


The case arises out of Kyrgyzstan's actions agains the Manas Bank, in which Mr. Belokon, a Latvian national, had invested, in 2010.  Mr. Belokon brought a UNCITRAL action in 2010.   When the arbitral award was rendered in 2015, Manas Bank was insolvent.  

In the arbitration proceedings, Kyrgyzstan presented evidence that the bank was engaged in money laundering, but the arbitral body did not find the evidence sufficient.  It noted that, had Kyrgyzstan presented substantial and probative evidence of money laundering, it might not have ruled in Mr. Belokon's favor.  

Kyrgyzstan challenged the award before the Paris Court of Appeal, which found substantial evidence that the award would enable Mr. Belokon to profit from money-laundering activities.  Mr. Belokon appealed to the Cour de Cassation, arguing that the Paris Court of Appeal exceeded its authority in considering facts not presented to the arbitral tribunal.  The Court de Cassation found that the public policy anti-corruption interest in this case outweighed the public policy interest in the finality of arbitral decisions.

Cour_de_Cassation _Paris_140320_1
Cour de Cassation Building
Image by Daniel Vorndran / DXR, CC BY-SA 3.0, via Wikimedia Commons


The scope of the decision is unclear.  Based on the authors' summary of the case, it is hard to tell whether the relevant evidence was unavailable to Kyrgyzstan at the time of the arbitration or if it simply neglected to present it.  One would think that difference ought to matter.  In addition, it is not clear how a reviewing court should weigh the public policy interest in ferreting out corruption against the public policy interest in the finality of arbitral decisions.  In this case, the Cour de Cassation was persuaded that enforcing the decision would enable Mr. Belokon to benefit from money-laundering and apparently it was convinced the the arbitral tribunal, if presented with the evidence it had before it, would have refused Mr. Belokon's demand for compensation.

December 20, 2022 in Government Contracting, Recent Cases | Permalink | Comments (0)

Friday, November 25, 2022

The Buffalo Billion Case in SCOTUS: Ciminelli v. United States

Divided ArgumentOnce again, Will Baude and Dan EppsDivided Argument podcast has alerted me to a SCOTUS case with contract implications of which I was previously unaware.  Those of you who are not interested in a listener's phone message featuring a song set to the tune of "Old McDonald" that alleges that Will Baude engages in "unpersuasive scholar trolling" or in the latest news about Justice A-leako (thanks for that one Strict Scrutiny Podcast) can skip to minute 36.  

The SCOTUS case is styled Ciminelli v. United States.  My recitation of the facts is indebted to the Second Circuit opinion in the case, which is styled United States v. Percoco.  The case should be of interest to those of us who cover the bid cases in first-year contracts courses.  The students can really understand those cases only if they understand a little bit about how bids on public construction projects operate.  In order to make it impossible for parties to bid shop, bid chop, or otherwise rig bids on public contracts, subcontractors (subs) are required to submit sealed bids to general contractors (GCs).  The GCs open the bids and often on the same day use the unsealed bids to put together their own bids, which are also sealed.  Bid cases arise when the subs try to retract erroneous bids that the GCs have relied on in putting together their bids.  Following Justice Traynor in Drennan v. Star Paving, unless the bid is obviously the product of a mistake, the Restatement approach treats the subs' bids as irrevocable based on the GC's reliance.  

Did I say that sealed bids make cheating impossible?  Apparently not.  I blogged recently about Victor Goldberg's work, showing that parties can contract around the common law option created by Drennan.  But Ciminelli involves a must more creative (and probably fraudulent) scheme.  Simplifying the facts, the defendants in Ciminelli/Percoco allegedly colluded to rig the bid materials so that preferred contractors would win bids.  The main author of the scheme set up intermediaries that were not a part of the scam.  He then contacted preferred contractors and gathered information about their businesses.  The requests for proposals, (RFPs) one for Syracuse and one for Buffalo (known as the "Buffalo Billion") were then tailored so that only the preferred contractors would qualify.  The scheme worked.  In both Syracuse and Buffalo, the innocent intermediary entity awarded lucrative contracts to the preferred contractors.  

The issue before the Court is whether defendant can be liable for fraud when the state has not proven that it was harmed by the defendant's conduct.  That is, defendants claim that they were indeed the most qualified bidder, and there is no allegation that the state overpaid for the work done or that the work was not competently completed.  The Second Circuit found criminal liability based on defendants' fraudulent interference with the state's "right to control."  Right to control violations occur whenever a scheme denies the victim the right to control its assets by depriving it of information necessary to make discretionary economic decisions.

In his Petition for Certiorari, Ciminelli attempts a frontal assault of on the right to control theory:

Whether the Second Circuit’s “right to control” theory of fraud—which treats the deprivation of complete and accurate information bearing on a person’s economic decision as a species of property fraud— states a valid basis for liability under the federal wire fraud statute, 18 U.S.C. § 1343.

2nd CircuitIn the appeal to the Second Circuit, defendants argued that the issuer of the RFP was not harmed "because the rigged RFPs merely awarded [defendant-controlled entities] preferred developer status, and did not affect the terms of the separate, subsequently negotiated development contracts."  Defendants also claimed that the government had not identified other parties offering "lower prices, better quality, or better value would have applied and been selected for either the Syracuse or the Buffalo contracts."

As to the first argument, the Second Circuit found that being named preferred developers made it much more likely that they would be awarded contracts, and so the fraud was relevant to an "essential element of the bargain."  That element of the fraud claim is thus satisfied.

As to the second argument, the "right to control" theory requires no showing of economic harm.  The deprivation of the right to control itself entails a violation of a property right.  As the Second Circuit held in Lebedev, "Since a defining feature of most property is the right to control the asset in question, . . . property interests protected by the wire fraud statute include the interest of a victim in controlling his or her own assets." In Finazzo, the Second Circuit clarified that the right-to-control theory requires proof only that "misrepresentations or non-disclosures can or do result in tangible economic harm" (emphasis mine).  

According to Will Baude and Dan Epps, nobody is defending the Second Circuit's "right to control" theory of fraud.  The case is likely to be remanded to see if the government can find an alternative basis for a fraud conviction.

I haven't looked into the law or the briefs on the case, but my instinct is to think that's a shame.  Based on the facts below, fraud has clearly occurred.  Determining whether anybody was harmed would require speculation about what might have happened had the RFPs not been rigged.  The state may have been harmed because there might have been lower bidders.  There is no way to prove that.  Other bidders might have been harmed because, but for the rigged RFPs, they might have bid and won.  But none of them bid, so it is unclear how any of them would have legal standing to allege that they were the victims of defendant's fraudulent misconduct. 

In an era less hamstrung by the Court's commitment to blinkered legal formalism, the government could make the case that, absent a "right to control" theory, there will be no remedy for the kind of fraudulent conduct alleged in this case. Perhaps the Court's expansive view of property rights will motivate it to embrace "right to control" theory sua sponte.   This case clearly involves a fraudulent scheme.  It was successful, and the perpetrators profited substantially.  The public likely paid too high a price for the services provided, but the extent of the harm is not provable with reasonable certainty.  Defendants' competitors were harmed, but they cannot prove it because the carefully crafted RFPs deterred them from bidding.  Who cares? Prophylactic rules may be over-inclusive in order to deter bad behavior.  The Court could uphold a broad rule intended to capture intentional cheating in the competition for public contracts.

 

November 25, 2022 in Famous Cases, Government Contracting, Recent Cases, Teaching | Permalink | Comments (2)

Monday, June 27, 2022

At It Again: The First Amendment and Contracts

How RightsThis week, I am putting the finishing touches on a law review article that grew out of this blog post.  The article is the first in a planned series of articles in which I attempt to channel  Jamal Greene's How Rights Went Wrong and argue that First Amendment rights are not absolute and that contractual rights and interests should also play a role in adjudication of constitutional disputes.  I think our current First Amendment jurisprudence provides too much protection for dumb speech and thus renders insipid the values that the Constitution is supposed to protect.  In short, I'm a jerk who doesn't support free speech.

But not really.  I favor full-throated protection of political speech, and the Eighth Circuit has provided me a chance to prove it!  The case is Arkansas Times, LP v. WaldripThe Court, sitting en banc, upheld Arkansas Act 710 (Act 710), which requires that contractors seeking to work with the state provide a certification that they will not participate in a boycott of Israel.  All parties seeking contracts with the state in excess of $1000 must provide a certification. If contractors refuse to file a certification, they can only be awarded a contract if their bid is 20% lower than the lowest certifying business.  The Arkansas Times challenged the certification on First Amendment grounds, and I would have sided with the Arkansas Times, as did lone dissenter, Judge Jane Kelly.  

In N.A.A.C.P. v. Claiborne Hardware Co., 458 U.S. 886 (1982), the Supreme Court found that the state violated the First Amendment when it prohibited peaceful political activity, such as that involved in the NAACP's boycott of businesses owned by whites.  The Arkansas Times argued that Claiborne governed its case. 

Arkansas instead relied on Rumsfeld v. Forum for Academic & Institutional Rights, Inc. (FAIR), 547 U.S. 47 (2006), in which the Court held that First Amendment protection does not extend to non-expressive conduct.  In FAIR, law schools denied military recruiters access to their campuses to protest the "don't ask, don't tell" policy.  Congress responded with the Solomon Act, denying federal funds to schools that closed their campuses to military recruiters.  In a baffling bit a sophistry, the unanimous court found that the First Amendment was not implicated in the law schools' challenge to the Solomon Amendment because the law schools' message was too unclear.  Conduct that needs to be explained to a neutral observer in order for its political content to be understood gets no First Amendment protection.  

Guess what!  The Eight Circuit, sitting en banc, found that contractors that refuse to sign Act 710 certifications engaged in non-expressive conduct.  The boycotts at issue in Act 710 are nothing like the boycotts at issue in Claiborne! It somehow reaches that conclusion not by looking into the possible messages business send by joining in boycotts of Israel but at the language and legislative history of Act 710.

Under Arkansas’s canons of statutory interpretation, we think the Arkansas Supreme Court would read Act 710 as prohibiting purely commercial, nonexpressive conduct. It does not ban Arkansas Times from publicly criticizing Israel, or even protesting the statute itself. It only prohibits economic decisions that discriminate against Israel. Because those commercial decisions are invisible to observers unless explained, they are not inherently expressive and do not implicate the First Amendment.

Draft_card_burning_NYC_1967This makes sense only in a world in which one could look at Mr. Cohen's "Fuck the Draft" jacket or at other protestors from that era burning their draft cards (or bras) and think, "How odd!  I wonder what these gestures are supposed to convey!  Oh well, unless they explain them to me, I guess I'll never know."  And really, what boycott sends a clear message?  When I see a protest, the first thing I do is walk up to someone with a sign (the slogans are often opaque) and ask, "What's going on here?  Why are you protesting."  The FAIR test is not just unfair.  It's absurd.

In any case, Judge Kelly's dissent makes mincemeat of the majority's selective account of the legislative intent, which was clearly directed at expressive conduct. "[T]he Act implicates the First Amendment rights of speech, assembly, association, and petition recognized to be constitutionally protected boycott activity."

But wait, what of the compelled speech that the certification entails?  Well, that's just incidental to the permissible regulation of non-expressive conduct.  Nobody is holding a gun to the would-be contractors' heads.  They don't have to sign anything.  It's just that if they don't certify their love for Israel, they can't compete for a state contract.  Even I, who thinks our First Amendment jurisprudence is dumb, can see that Arkansas main goal is not commercial regulation but to use its economic power (the power of contracts!) to chill free expression.

An aside.  Act 710, like its counterparts in other states, defines “boycott of Israel” to include any actions "intended to limit commercial relations with Israel, or persons or entities doing business in Israel or in Israeli-controlled territories . . . ” (emphasis added).  The "Israeli-controlled territories" are not Israel.  If they were, then there would be 5.3 million Palestinians entitled to Israeli citizenship.  That ain't happening.  The "Israeli-controlled territories" are occupied territories.  Boycotting the occupation is not a boycott of Israel.  These state acts punish entities not for boycotting Israel but for boycotting the occupation.  There's a huge difference.  Ask Ben & Jerry's, which is subject to divestment actions by Arkansas and other states for its refusal to sell its products in the occupied territories.  But Ben & Jerry's has remained committed to selling its products in Israel.  

The inclusion of the language about the "Israeli-controlled territories" is, in my view, conclusive proof that Act 710 is not an economic measure.  It is a political measure and compelled compliance with the state's political stance on the Israeli occupation violates the First Amendment.  Even if I did not think Act 710 violated the First Amendment, I would still find it preposterous that any U.S. state would blur the lines between support for Israel and support of the occupation.

June 27, 2022 in Commentary, Current Affairs, Government Contracting, In the News, Recent Cases, Recent Scholarship | Permalink | Comments (0)

Thursday, April 28, 2022

[Allegedly] Corrupt Government Contracts in Oklahoma

As reported here on nondoc.com, Oklahoma's Department of Tourism and Recreation has cancelled its contract with Swadley’s Foggy Bottom Kitchen, which provides food service in Oklahoma state parks “due to suspected fraudulent activity and questionable business practices.”  More specifically, in its termination letter, the Department noted that Swadley's seemed to be engaged in "highly questionable billing, invoicing, and record keeping practices."

BBQSwadley's insists that it has done nothing wrong and that it has cooperated with state employees all along . Swadley's cause was not furthered when a 2018 video surfaced in which Swadley's founder Brent Swadley states, “I bootlegged barbecue. I wouldn’t be where I’m at today if I followed by the rules and satisfied all the permits and all the legalities and stuff out there. Sometimes you’ve just got to go out there and do it and don’t worry about it.”

Swadley's won the contract to provide food services in Oklahoma's state parks after a bid procedure in which it was the only bidder, and the reporting suggests that the terms of the contract changed significantly in Swadley's favor after it was awarded the contract.  Swadley's was allegedly paid $17 million in management fees and renovation costs, and there are suggestions that the  Department had not engaged in adequate oversight.  Swadley's was paid $1.3 million in management fees alone, a marked increase from the $0 paid to previous operators.  

In the meanwhile, the state is scrambling to provide food service and catering in its state parks.  You do not want to be around a hungry Oklahoman who can't find a barbecue joint.

April 28, 2022 in Current Affairs, Food and Drink, Government Contracting, In the News | Permalink | Comments (0)

Monday, November 22, 2021

Sid DeLong on Restitution and the Case of Andrew Cuomo

More Restitutionary Pitfalls for Aspiring Authors (Who Serve in Government)

Sidney W. DeLong

A recent dispute involving the former Governor of New York raises interesting questions about disgorgement as a remedy for breach of fiduciary duty by government officials. It also dramatically illustrates the financial risks that liability for disgorgement poses to defendants who may not have realized that they were acting wrongfully and who have received and disposed of funds before learning that they must turn them over to the plaintiff.

Disgorgement is often the only effective remedy in cases in which a breach of fiduciary duty causes harm to the plaintiff that is difficult to prove or impossible to calculate, making an award of compensatory damages measured by the plaintiff’s loss unfeasible. If plaintiff can prove that defendant was enriched by the breach, the defendant must disgorge to the plaintiff any net gains it obtained as a result of the breach, regardless of their source. Such a claim for disgorgement is entirely unrelated to any harm the plaintiff may have suffered from the wrongdoing and may give plaintiff a windfall. But disgorgement of the wrongdoer’s entire gain from the breach is thought to be necessary to prevent defendant’s unjust enrichment from the wrong and has the virtue of completely removing the incentive for wrongdoing. The same rule applies to breaches of statutory duties and other tortious wrongs.

Bolton bookAn earlier post suggested the potential liability of John Bolton for disgorgement of the proceeds of his book, In the Room Where it Happened, on the theory that his publication of the book violated federal law and his employment contract with the government. 

Perhaps inspired by Bolton’s dispute, as reported in The New York Times, the State of New York has recently announced that it will seek disgorgement of the proceeds of former Governor Andrew Cuomo’s book American Crisis: Leadership Lessons from the Covid-19 Pandemic on the grounds that, in obtaining legally-necessary permission from the Joint Commission of Public Ethics (JCOPE) to publish the book, Cuomo wrongfully failed to disclose that he had illegally used government resources, including employee time, to produce the book.  Cuomo denies wrongdoing and says that publication was not wrongful because he received permission from the Commission for the publication. The State seeks recovery (disgorgement) of all amounts paid or to be paid to Cuomo by his publisher.

According to news reports, Cuomo received an advance of over $3 million with $2 million more to be paid over the next two years. The latter payment is unlikely to come due because of poor sales of the book. Cuomo’s attorneys have stated that after payment of expenses and taxes, he donated $500,000 of the proceeds to charity and placed the $1.5 million remainder in a trust for his children.

Cuomo BookAs an accounting detail, disgorgement usually reaches only the net amount of unjust enrichment after deducting the wrongdoer’s out of pocket costs of obtaining it. But the amounts that Cuomo claims to have spent on income taxes should not reduce his duty to disgorge the entire sum. If he is forced to disgorge the publisher’s pre-tax payment his only remedy is to file an amended tax return and seek recovery of the tax overpayment from the U.S. Government. Of course, he would be required to disgorge the amounts of his gifts to charity and to his children’s trust.

In cases such as Cuomo’s in which the defendant’s violation of law is unclear or unintentional, disgorgement may seem draconian, conferring a windfall on the plaintiff out of proportion to any harm it may have suffered and sandbagging defendant with unexpected liabilities that it may be in no position to pay. This is a stiff price to pay for the deterrent

Restitutionary claims over identifiable proceeds of wrongdoing may sometimes even reach beyond the wrongdoer to innocent transferees of the proceeds. If Cuomo is unable to pay back the full $3 million, the State may seek to claw back the money from the charity or the children’s trust, using the legal theory of fraudulent conveyance. These claims seem unlikely to succeed, however, because there is no indication that the transfers were made to hinder, delay, or defraud Cuomo’s creditors. But if Cuomo becomes insolvent, his bankruptcy trustee might be able to recover the payments as fraudulent transfers without having to prove that they were made with such intent.

As cautionary tales for government-employed authors, the Bolton and Cuomo cases can be distinguished. Assuming in each case that the government’s allegations are correct, Bolton’s wrong was in breaching his statutory and contractual duties of pre-clearance and non-disclosure, security breaches that could potentially harm the government in ways that were incalculable. As in Snepp, disgorgement of all the author’s gains from such breaches was the only feasible remedy.

By contrast, Cuomo’s initial wrong seemingly consisted only in misappropriating or misusing government resources for his private benefit, trivial misbehavior that  harmed the government in ways that are easily calculable by reference to the wages of governmental employees and the costs of office supplies.

However, JCOPE’s main complaint is that his concealment of this misuse might also have constituted an ethical breach or even a breach of fiduciary duty. This would have breached his legal duties as governor as well, in which case, perhaps New York did not ask for enough. It is, after all, it is hornbook law that a faithless fiduciary forfeits his fee in addition to any profits he may have made by breaching his trust. See Restatement (Third) Restitution § 43. The theory is that the fiduciary did not earn the compensation because he did not fulfill his duties. On this theory, attorneys have forfeited their legal fees when they breached duties to their clients. One can see great revenue-raising potential in an aggressive use of this theory. Perhaps the State of New York should seek restitution of the salary and benefits of every state official who has been shown to breach his or her fiduciary duty to the State.  It’s not likely to happen, but if it does, remember you read it here first!

November 22, 2021 in Commentary, Current Affairs, Government Contracting, In the News, Recent Cases | Permalink | Comments (0)